Japan government more bullish on capex, eyes on U.S.-China trade row

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TOKYO (Reuters) - Japan upgraded its assessment of capital expenditure for the first time in nine months as companies ramp up spending on equipment and software to better cope with growing labour shortages.

FILE PHOTO: A Japanese flag flutters atop the Bank of Japan building in Tokyo, Japan, September 21, 2016. REUTERS/Toru Hanai/File Photo

The government left unchanged its overall assessment that the economy is recovering at a moderate pace in its monthly report for September, released on Friday.

It also flagged the possibility that a trade war between the United States and China could hurt Japan because a large portion of Japan’s exports to China are used to make smartphones destined for the U.S. market.

Capital expenditure is rising, the government said in the report, which marked an upgrade from last month’s assessment that capex was rising only gradually.

The government upgraded capital expenditure after it revised up economic growth in the second quarter due to an increase in business investment, a government official told reporters.

The upgrade also follows a stronger-than-expected rise in machinery orders in July, which is considered a leading indicator of business investment.

Japan’s workforce is shrinking due to its rapidly ageing population and companies across a broad range of industries are investing more in automation and IT systems to operate with fewer staff.

More capital expenditure should push up economic growth, but a series of retaliatory tariffs between the United States and China weighs on the outlook.

Manufacturers in China use parts and equipment from Japan to make smartphones and computers, which account for around half of China’s exports to the United States, the report said.

Japan’s role in the global supply chain makes it vulnerable to a decline in Chinese exports to the United States, a government official told reporters.

The government left unchanged its assessment that consumer spending is recovering, but it did acknowledge a decline in spending on domestic travel and dining out due to a series of torrential rain storms.